With Britain’s EU exit, open skies have become partly cloudy

Great Britain’s pending exit from the EU creates new
challenges in international aviation. But it’s far too soon to say what impact
Brexit will ultimately have on U.S. air travel.

“This is all going to take a long time. The immediate
impact is it just got a little cheaper to go to Europe a lot cheaper to go to
the U.K.,” said Seth Kaplan, managing partner of the newsletter Airline Weekly.

Indeed, data on Monday showed that following Great
Britain’s June 23 Brexit vote, which sent the pound sterling to a 31-year low,
airfares had dropped as much as 6% between U.S. hubs and London, according to
the website FareCompare.

That’s good news for U.S. travelers, of course, but
Brexit has been bad news for stockholders. Shares at American, Delta and United
were all down at least 5% Monday following even steeper declines on Friday. The
airlines aren’t yet speculating on how Brexit will impact them over the long
run. United, Delta and American played it safe in statements they issued.

“It is too early to say what the results of the vote mean
for aviation in the U.K., one of the world’s leading air markets, in the long
term,” Delta said. “It’s business as usual for the foreseeable future for
Delta's flights between the U.S. and Britain. Delta remains committed to the
U.K. market.”

Analysts expect the airlines will wait until their second-quarter
earnings calls next month to offer more insight on Brexit. Still, conventional
wisdom is that American could be the most affected among the three legacy U.S.
carriers. American operates 25 flights per day between the U.S. and the UK,
more than its competitors. And American’s extended route network is tied into a
joint venture with British Airways, the U.K.’s largest carrier.

“American Airlines relies on British Airways connections
via London Heathrow to countries such as India, South Africa and Sweden that
American Airlines does not serve directly from the United States,” wrote analyst
West Coast Growth Picks in a column for the website Seeking Alpha.

“The vast
majority of these flights are targeted at British traveling between the U.K.
and these countries with some seats sold to American Airlines passengers
looking to connect to these countries via London. If a U.K. recession caused
British Airways to either reduce or eliminate service to some of these
destinations, it would affect the network that American Airlines is able to
offer its customers.”

Delta is also closely tied into the U.K. The
Atlanta-based carrier has a joint venture with Virgin Atlantic, of which it owns
49%.

What impact Brexit has long-term on aviation will in
significant part be determined by how the U.K. negotiates new aviation
agreements with the U.S. and European Union. Under the current open skies
agreement between the U.S. and EU, U.S. and British carriers can fly freely
between the U.S. and any country in the Eurozone. Kaplan said that such rules
could very well remain in place under a deal with Great Britain. But he noted
that there are scenarios in which U.K. carriers would end up with more limited
access to EU skies.

“There are already voices in Europe saying they should
punish the U.K. to show that they can’t have the milk without buying the cow,”
he said.

Under a worst-case scenario, Kaplan said, the U.K. could
return to 2008, before the U.S. and Europe completed their open skies
agreement, when only four carriers were allowed to fly between Heathrow in the
U.S.

Complexities could also remain even if Great Britain
successfully negotiates a deal in which it retains full open skies benefits
within the U.S. and Eurozone. For example, Norwegian Air Group, which is
fighting for a controversial permit to fly to the U.S. from an Ireland-based
subsidiary, says it needs the Irish entity to more easily expand its route
network beyond the U.S. and Europe to South America, Asia and Africa than it
can from its Norway-based Norwegian Air Shuttle.

The reason is because while Norway is a signatory to the
EU open skies agreement, it, unlike Ireland, is not a member of the EU.

Barry Humphreys, a U.K.-based aviation analyst, said he
doesn’t see extended route networks being a significant issue for U.K. airlines
and their partners due to the extensive bilateral agreements Great Britain
already has in place with nations outside the EU.

But he said one impact Brexit could have is on the
European open skies debate regarding the Gulf carriers Emirates, Qatar and
Etihad. As in the U.S., those rapidly expanding carriers have drawn criticism
from some European airlines for allegedly accepting government subsidies in
violation of aviation agreements. However, while powerhouses Lufthansa and Air
France are pushing the EU to get tough on the Gulf carriers, International
Airline Group, which includes British Airways, has vocally supported open markets.

“If the U.K. exits that debate, the conversation is going
to swing very strongly,” Humphreys said.

Increased restrictions on the Gulf carriers at their
European hubs could impact their route networks into the U.S.

Drawbacks aside, Brexit isn’t without potential silver
linings when it comes to U.S. aviation, according to a note prepared June 24 by
Hunter Keay of Wolf Research.

Keay wrote that if Great Britain’s exit from the EU
portends an increase in nationalistic policies, it could lead to Heathrow being
closed off to rapidly growing Middle Eastern airlines — for example, Emirates,
Etihad and Turkish. It might also raise more questions about Norwegian’s plan
to use the Irish entity to operate cheap transatlantic flights.

“Thinking two steps down the road, we see scenarios that
could very easily result in clear positives for U.S. airlines at [Heathrow],”
Keay wrote. ___

Correction: Delta owns 49% of Virgin Atlantic. A previous version
of this report said in error that Delta owns a stake in Virgin America.